Canadian Economy Grew By 2.9% In Fourth Quarter

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TORONTO, ON - JANUARY 20 - Jessica Bathan stands on a vent releasing warm air on Bay Street south of King Street West while waiting for a bus during a cold weather alert in Toronto on January 20, 2014. (Carlos Osorio/Toronto Star via Getty Images)

OTTAWA - Canada's economy showed surprising strength at the end of last year, shaking off the December deep freeze and weakness in the United States to post a respectable two per cent annual growth rate - the best since 2011.

The 2.9 per cent advance in the final quarter was four-tenths of a point better than economists had predicted, and the annual growth rate was three-tenths of a point higher than either the Bank of Canada or Finance Minister Jim Flaherty had been projecting.

The strong results also halted the recent decline of the Canadian loonie, which was trading 0.40 cents higher at above 90-cents US following release of the report on Friday.

"The headline number looked pretty good ... this is a clear sign the economy is not falling off the cliff as some people had suggested," said Peter Buchanan, a senior economist with CIBC World Markets.

Buchanan noted that not all the news was good. Inventories accounted for almost half the growth, which means they will have to be shipped out at a future time and could slow output at the beginning of 2014. And, December saw a worst-than expected dip of 0.5 per cent in output from November.

Some of that retreat last month was likely due to severe weather both in Canada and the U.S., the largest export market. If that is the case, it may lead to catch-up growth later this year.

"The broad-based nature of the decline suggests that the ice storm carried wide-ranging effects, and we expect at least a partial rebound in January," said Doug Porter, chief economist with the Bank of Montreal. "However, the persistently harsh winter...will likely frustrate a full rebound — weighing on sectors such as transportation, construction, and possibly retail."

One of the surprises is that with the strong quarter, in combination with upward revisions in the first half of the year — which turned out not to have been as weak as first thought — Canada may have edged out the U.S. for growth in 2013 at 2.0 per cent over 1.9 per cent. On Friday, the U.S. downgraded its initial fourth quarter GDP estimate from 3.2 to 2.4 per cent.

Beating the U.S. in growth is a mixed blessing for Canada, which is counting on a strong American recovery to keep its economy pushing forward in 2014.

Earlier this week, Flaherty said he was hopeful that the economy would prove stronger in 2014 than the 2.3 per cent he projected in his February budget.

That remains to be seen, said Buchanan, since December's poor showing will make for a weak hand-off into January. But the report will further silence talk that Bank of Canada governor Stephen Poloz may be contemplating a rate cut this year.

Poloz's next opportunity to pronounce on interest rates comes next week and the unanimous view among established economists is that he will keep the overnight rate cemented at one per cent, where it has stood since the fall of 2010.

Another soft part of the GDP report, said economists, was that consumer spending rose 3.1 per cent. That is considered unwelcome because of the high level of consumer debt and the Bank of Canada's hope that the economy will start relying less on consumers and more on exports and business investment.

"In January, Poloz lamented that the composition of the strong Canadian GDP of quarter three left a lot to be desired — nothing will make him more satisfied in today's report, which was squarely a consumer spending and farm-sector inventory story once again," noted economist Jimmy Jean of Desjardins Capital Markets.

He said it was good news that the spending did not come from debt accumulation, as the data showed personal disposable income growth grew at four per cent, and the savings rate also rose.

Although inventories and spending dominated, there was some solid performances in other sectors as well, with mining and oil and gas extraction, manufacturing and business investment in machinery and equipment all positive. Business investment in structures fell, as did housing.

The Bank of Canada will also take solace in the news that exports rose 0.4 per cent, non-annualized, in the quarter, after a flat reading in the third quarter. The central bank has pinned growth on the revival of the export sector, which it believes will lift business confidence and lead to new investments and hiring.

For December, the agency said the weakness was registered across the economy, with both goods-producing industries and services registering declines as manufacturing, retail and wholesale trade and construction all fell back. It was the first monthly setback in five months.

In revisions that helped the annual growth number, Statistics Canada said the economy had advanced by 2.9 per cent and 2.2 per cent respectively in the first and second quarters of 2013. It had previously recorded those growth rates as 2.3 and 1.6 per cent. The 2.7 per cent rate in the third quarter was left unchanged.